Q4 2024 Trane Technologies PLC Earnings Call
Thank you.
Regina: Good morning and welcome to the Train Technology's 4th Quarter 2024 Earnings Conference Call. My name is Regina and I will be your operator for the call.
Regina: The call will begin in a few moments with the speaker remarks and the Q&A session. At this time, all participants are in a listen-only mode.
Regina: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number 1 on your telephone keypad.
Speaker Change: We ask that you please limit your questions to one and one follow-up. I will now turn the call over to Zach Nagle, Vice President of Investor Relations. Please go ahead.
Zach Nagle: Thanks, Operator. Good morning, and thank you for joining us for Training Technology's fourth quarter 2024 EARNINGS conference call.
Zach Nagle: This call is being webcast on our website at trainingtechnologies.com, where you'll find the accompanying presentation. We're also recording and archiving this call on our website.
Zach Nagle: Please go to slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law.
Zach Nagle: Please see our SEC filings for a description of some of the factors that may cause actual results to differ materially from anticipated results.
This presentation also includes non-GAP measures.
Zach Nagle: which are explained in the financial tables attached to our news release.
Speaker Change: Joining me on today's call are Dave Regnery, Chair and CEO, and Chris Kuehn, Executive Vice President and CFO. With that, I'll turn the call over to Dave.
Dave Regnery: Thanks, Zach, and everyone for joining today's call. Please turn to slide number three. I'd like to begin with a few minutes on our purpose-driven strategy, which enables our differentiated financial results over time.
Dave Regnery: At Trane Technologies, we continuously innovate for a sustainable world, and our innovation is driving significant customer demand. We are the partner of choice to ensure optimal performance while reducing energy use and emissions.
Dave Regnery: Our customers know that our solutions are green for green, good for the planet, and good for the bottom line.
Dave Regnery: Our relentless investment in innovation powers our flywheel of market outperformance and strong free cash flow.
Dave Regnery: With this momentum, our proven business operating system, and our uplifting culture, we are well positioned to deliver a leading growth profile and differentiated shareholder value into the future.
Dave Regnery: Please turn to slide number four. We expect to deliver top quartile financial performance over the long term, consistently and reliably for our shareholders.
Dave Regnery: This is core to our culture and central to how we set our targets and execute our strategy across our global portfolio.
2024 was a standout year for the company.
Dave Regnery: I'm proud of how our global teams exceeded our targets, top to bottom.
Dave Regnery: We closely track top quartile performance against our core peer group and believe our performance will rank in the top quartile on organic revenue growth, up 12%, as well as adjusted EPS growth, up 24%.
Dave Regnery: We also delivered free cash flow of $2.8 billion, or 109% free cash flow conversion, enabling us to make key strategic M&A investments while raising our dividend and returning significant cash to shareholders through share repurchases.
Please turn to slide number five.
Dave Regnery: Relentless investment in innovation, growth, people, culture, and our business operating system have yielded clear benefits over time, demonstrated by our strong track record.
Dave Regnery: Since 2020, we've delivered a revenue compound annual growth rate of 12%. Expanded our adjusted EBITDA margins by 400 basis points.
Dave Regnery: and delivered free cash flow conversion of 108% while deploying approximately $12 billion of capital.
Dave Regnery: We believe that consistent business reinvestment is key to our long-term success.
Dave Regnery: For over a decade, we've added a high level of incremental investments each year in high ROI projects.
Dave Regnery: This has resulted in a world-class direct Salesforce channel and service organization.
Dave Regnery: It has also enabled us to develop cutting-edge solutions for the most pressing customer challenges.
driving strong demand.
Dave Regnery: We have all the essential ingredients to execute our strategy and continue driving differentiated returns for our shareholders over the long term.
Please turn to slide number six.
Dave Regnery: We delivered robust financial results in the fourth quarter, extending our strong track record of execution and industry-leading revenue and EPS growth.
Dave Regnery: Our global team achieved 10% organic revenue growth, 110 basis points of adjusted EBITDA margin expansion, and 20% adjusted EPS growth.
For more information visit www.FEMA.gov
Dave Regnery: Organic bookings for full year 2024 were strong up 11% with a book to bill ratio of 102% on top of 12% organic revenue growth.
Dave Regnery: This contributed to a highly elevated backlog of $6.75 billion entering 2025.
Dave Regnery: We saw strong performance across our segments, led by our commercial HVAC businesses.
Dave Regnery: Fourth Quarter America's and EMEA Organic Commercial HVAC bookings were both strong, each up more than 30% on a three-year stack.
Fourth quarter organic revenues were exceptional.
Dave Regnery: with America's commercial HVAC up mid-50s percent on a three-year stack and EMEA commercial HVAC up more than 60% over the same period.
Dave Regnery: Our teams are excelling in complex bespoke applied projects, which are key to the multi-year CAPEX cycle, especially in high growth verticals.
Dave Regnery: For instance, three-year stack organic revenue growth in applied systems for our Americas and EMEA commercial HVAC businesses is up over 120% and 90% respectively.
Dave Regnery: Applied systems offer a durable service tail of eight to ten times the initial equipment cost over their lifespan.
Dave Regnery: Meeting our strong growth in applied solutions presents tremendous service opportunities with higher margins that are largely still ahead of us.
Dave Regnery: Looking beyond the continued strength in commercial HVAC, we see several tailwinds in 2025. We believe residential markets have largely normalized and are returning to our long-term framework of GDP plus growth.
Dave Regnery: The America's transport refrigeration markets are expected to bottom in the first half of 2025, paving the way for a second half recovery and strong growth in 2026 and 2027.
Dave Regnery: In addition, the challenges associated with our actions in the second half of 2024 to tighten credit policies in China are improving ahead of our initial expectations.
Dave Regnery: Given our consistent performance over time, we are confident in our ability to deliver strong results in 2025. We are initiating a strong guide for the year, which Chris will cover in more detail in a few minutes.
Please turn to slide number seven.
Dave Regnery: Demand for our innovative solutions was broad-based across our segments in the fourth quarter. In our America segment, commercial HVAC bookings were up high single digits. Revenues were up mid-teens in both equipment and services.
Dave Regnery: presidential revenues were up low teens consistent with the second and third quarters.
Dave Regnery: Transport refrigeration bookings were down high 20s after being up high 20s in the third quarter, reflecting the inherent lumpiness associated with the timing of large customer orders in this business.
Dave Regnery: revenues were down low teens outperforming in markets which were down more than 20% in the quarter.
Dave Regnery: In EMEA, commercial HVAC bookings were up mid-single digits in the quarter versus a tough prior year comp.
Two-year stack bookings were up 20%.
Revenue was also strong, up below teens.
Dave Regnery: Our transport business performs in line with our expectations, with revenues down low single digits.
In Asia-Pacific, our team demonstrated resilience, achieving strong sequential improvement.
Dave Regnery: Bookings in the region were up 8% and revenues were up 1%.
Dave Regnery: strengthened the rest of Asia more than compensated for the softness in China where bookings were down low single digits and revenues declined by low teens. Now I'd like to turn the call over to Chris. Chris?
Chris Kuehn: Thanks Dave. Please turn to slide number eight. This slide provides a snapshot of our fourth quarter performance showcasing strong execution across the board.
Chris Kuehn: Organic revenues were up 10%, adjusted EBITDA margin increased by 110 basis points, and adjusted EPS rose by 20%.
Chris Kuehn: At the enterprise level, we achieved robust organic revenue growth in both equipment and services up high single digits and low teens, respectively.
Chris Kuehn: Our high-performance flywheel continues to yield results with relentless investments in innovation driving top-line growth, margin expansion, and EPS growth.
Please turn to slide number nine.
Chris Kuehn: At the enterprise level, we achieved robust volume growth, positive price realization, and productivity gains that offset inflation and high levels of business reinvestment.
Chris Kuehn: In the Americas, we deliver 9 points of volume growth and 2 points of price.
Chris Kuehn: Strong performance in commercial HEAC and residential was partially offset by softer transport results.
Chris Kuehn: Adjusted EBITDA margin expanded by 140 basis points driven by volume growth, productivity, and price realization.
Chris Kuehn: In EMEA, we delivered six points of volume growth and one point of price with strong commercial HVAC performance.
Chris Kuehn: Adjusted EBITDA margin expanded by 20 basis points, driven by volume growth, productivity, and price realization.
Chris Kuehn: In Asia-Pacific we delivered one point of price and volume was flat.
Chris Kuehn: EBITDA margin expansion was driven by price realization and strong productivity, more than offsetting inflation and business reinvestment.
Dave Regnery: Now I'd like to turn the call back over to Dave. Dave?
Dave Regnery: Thanks, Chris. Please turn to slide number 10. This slide outlines the key dynamics shaping our market outlook and guidance for 2025. In the Americas, we anticipate continued strong execution and broad-based strength in core markets with particular momentum in high growth verticals.
Dave Regnery: Our world-class direct sales force and leading innovation are powerful competitive advantages that enable us to optimize opportunities and drive market outperformance.
Dave Regnery: We expect residential markets to return to a GDP-plus framework in 2025, following a modest pre-buy of around $75 to $100 million in Q3 and Q4 of 2024.
Dave Regnery: Most of this pre-buy is expected to impact the first quarter of 2025. For the full year, we see mid-single-digit growth in the residential business with a tailwind from the low GWP mix.
Dave Regnery: Turning to transport, we expect relative flat markets in 2025, plus or minus low single digits. The market should bottom in Q1, down about 25 percent year over year, then rebound in the second half, aligning with freight market recovery forecasts.
Dave Regnery: While the exact timing and speed are uncertain, ACK predicts a sharp recovery in both 2026 and 2027, up mid-teens each year. We've continued to invest heavily during the market downturn, and we are well-positioned to outperform as the market comes back.
Dave Regnery: In EMEA, we expect continued strength in commercial HVAC in 2025, driven by strong execution in core markets and tailwinds from thermal management systems, services, and key growth verticals.
Dave Regnery: EMEA transport markets are expected to be flat to up low single digits in 2025, and we expect to outperform.
Dave Regnery: In Asia, we anticipate a flattish market for the year due to a soft macro backdrop and our tightened credit policies impacting the first half of 2025.
Dave Regnery: We expect muted performance in China to be offset by growth in the rest of Asia. Now I'd like to turn the call back over to Chris. Chris?
Thanks Dave. Please turn to slide number 11.
Dave Regnery: Our 2025 guidance reflects the market dynamics outlined on the prior slide and our optimism about our ability to outperform.
Dave Regnery: It also incorporates our value creation flywheel, emphasizing continued investment in innovation, market outgrowth, healthy leverage, and strong free cash flow.
Dave Regnery: We are initiating 2025 guidance with 7% to 8% organic revenue growth and adjusted earnings per share of $12.70 to $12.90, representing approximately 13% to 15% EPS growth.
Dave Regnery: This includes about 100 basis points of negative FX and roughly 50 basis points of growth from M&A impacting revenue, which together are expected to negatively impact earnings by about $0.20 for the year.
Dave Regnery: You're targeting organic leverage of 25% or higher, consistent with our long-term goals.
Dave Regnery: We anticipate another year of 100% or greater free cash flow conversion in 2025.
Dave Regnery: Looking at the first quarter of 2025, we expect approximately 6% to 7% organic revenue growth driven by continued strength in commercial HVAC.
Dave Regnery: We expect adjusted EPS in the first quarter to be between $2.15 and $2.20 with a midpoint of $2.17.
This midpoint represents about 17% of our full year guidance.
Dave Regnery: ahead of our three-year and five-year historical averages of approximately 15 to 16 percent.
Dave Regnery: Overall, we believe our Q1 guidance is strong and an achievable start to the year.
Dave Regnery: For additional details related to our guidance, please refer to slide number 18.
Please go to slide number 12.
Dave Regnery: We remain committed to our balanced capital allocation strategy focused on deploying excess cash to maximize shareholder returns.
First, we strengthen our core business through relentless reinvestment.
Dave Regnery: Second, we maintain a strong balance sheet to ensure flexibility as markets evolve.
Dave Regnery: Third, we expect to deploy 100% of excess cash over time.
Dave Regnery: Our approach includes strategic M&A to enhance long-term returns and share repurchases when the stock trades below intrinsic value.
Please turn to slide number 13.
Dave Regnery: In 2024, we deployed or committed approximately $2.5 billion through our Balanced Capital Allocation Strategy with approximately $800 million to dividends, $470 million to M&A, and $1.3 billion to share repurchases.
We made several strategic bolt-on acquisitions.
Dave Regnery: enhancing our AI and digital building management capabilities, expanding specialized refrigerated transport, and making multiple channel investments.
Dave Regnery: Our M&A pipeline remains active, and we will continue to be disciplined in our approach.
Dave Regnery: In addition, with $6.2 billion remaining under repurchase authorizations, we have strong flexibility as our shares trade below our calculated intrinsic value.
Dave Regnery: For 2025, we expect to deploy between $2.5 billion and $3 billion in capital.
Dave Regnery: Our strong free cash flow, liquidity, balance sheet, and significant share repurchase authorization provide excellent capital allocation optionality moving forward.
Dave Regnery: Now I'd like to turn the call back over to Dave. Dave?
Dave Regnery: Thanks Chris. Please turn to slide number 15. We've already covered our transport market expectations in the Americas and EMEA on slide 10, so I'll keep my comments brief.
Dave Regnery: While the America's transport refrigeration markets have been more volatile in recent years compared to the five years preceding the 2020 pandemic, the long term outlook remains strong. ACT forecasts show an average of 44,000 trailer units per year over a 15 year period.
For 2026 and 2027, ACT projects mid-teens growth.
Dave Regnery: The future looks bright, and we're excited about the opportunities ahead.
Dave Regnery: Please turn to slide number 16. In summary, we are well positioned to deliver leading performance and differentiated shareholder returns in 2025 and beyond.
Dave Regnery: Our uplifting and engaging culture, combined with our leading innovation and proven business operating system.
Dave Regnery: continue to set us apart. I'm proud of our team's consistent track record of growth, including our standout performance in 2024. And I truly believe our brightest days are still ahead. And now we'd be happy to take your questions. Operator.
Speaker Change: At this time if you'd like to ask a question press star followed by the number one on your telephone keypad. We ask that you please limit your questions to one and one follow-up. Our first question comes from the line of Chris Snyder with Morgan Stanley. Please go ahead.
Speaker Change: Thank you for the question. I wanted to ask on service, with Q4 up, low teams again, I think America was in the mid-teams in Q4.
Speaker Change: And, you know, service has now grown at a double-digit rate for the last three to four years. And, Dave, I know you typically talk about high single-digit service growth.
Speaker Change: I just wanted to get a sense for the outlook here and what's baked into this 2025 Guide on Service, which I know in the past you've said has usually lagged equipment by a couple years.
Speaker Change: Hey Chris, how you doing? Thanks for the question. Yeah, I'm so proud of our service business. Just the growth rates that we've seen there. Chris makes me use a seven-year CAGR on that, so that's where the high single digits comes from. And it's very high, high single digits. But look...
Speaker Change: You know, we were up mid-teens, or low-teens, I'm sorry, in the fourth quarter, low-teens for the full year. Our service business now, from a dollar basis, is 6.5 billion dollars.
Speaker Change: and just tremendous growth that we're seeing there. And if you think about our backlog, right, which is, you know, predominantly on commercial HVAC, predominantly applied.
Speaker Change: That's really where our service business was designed, around our applied solutions. And the more complex those solutions become, the more propensity for the OEM to do the service work.
Speaker Change: We'll keep our guide at the high, high single digits, but think about $6.5 billion that's growing at a close to 10% rate per year in the last couple of years have been in that double digit.
Speaker Change: range, as you said, it's a very resilient business and I can tell you that we're operating very well there. It's part of our operating system, the cadence that we have there, and we're really hitting on all cylinders right now.
[inaudible]
Speaker Change: No, really, really appreciate that. And then, you know, maybe turning over to, you know, the commercial HVAC equipment, you know, orders this quarter, you know, high singles a bit better than last quarter, low singles, comp seems to be the same.
Speaker Change: And I know there's always a lot of focus on data center, but you guys do, obviously, I think you talked to 13 or 14 commercial verticals. So, was that improvement, is that just project lumpiness? Or when you look across those verticals, do you see positive rate of change across some of them? Thank you.
Speaker Change: That's a great question. Look, our order grade for commercial HVAC in the Americas was up high single digits. On a two-year stack, it's over 20 percent. On a three-year stack, it's over 30 percent.
Speaker Change: So we continue to see tremendous growth in our commercial VAC business.
Speaker Change: As far as the verticals, yeah, we track 14 different verticals.
Speaker Change: and we're seeing growth, yes we're seeing growth in data centers. It's been a strong vertical for us in the past, it's going to be a strong vertical for us in the future, but we're seeing broad-based growth.
Speaker Change: And if you think about it, I mean, the revenue for the Americas for the year was up over 20%. And we had growth in 13 of the 14 verticals.
Speaker Change: The only vertical that did not show growth was life science, and it's been challenged all year, but we're very optimistic about the future there. So think about that. We're showing broad-based growth, and you would expect that from trained technologies with the broad-based portfolio of products and services that we have. We didn't design our portfolio of products to serve a particular vertical.
Speaker Change: We designed it to serve the market, and that's exactly what we're doing. And if you take that with our direct sales force, with deep domain expertise, knowledge, at both a technical level and then within a vertical level, you could understand why we're being able to have this broad-based growth. So,
Speaker Change: We're very excited about what we're seeing in commercial HVAC. The team's performing very well, and the pipeline, too, is very, very strong. So we, obviously, we report orders, but the pipeline is what the team's working on, and that remains very, very robust.
Speaker Change: Chris, I would add, you know, thinking about our applied solutions, which impact many of those 14 verticals, you know, revenues in applied are up over 120% in the Americas, commercial HVAC business over the last three years, and the EMEA business is up more than 90%.
Speaker Change: and that is building an install base that then drives services that, think of that as a few years after the install base, the service revenues start to apply post warranty period.
Dave Regnery: that's largely in front of us. So it's a very durable tail as Dave described and really excited that, again, applied serves multiple verticals.
Thank you, guys. Really, really appreciate that.
Thanks, Chris. Thank you.
Speaker Change: Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Speaker Change: Maybe just the first question around the sort of organic sales guide through the year. So I think a lot of investors would have expected maybe a slow start to the year and then an acceleration because of Resi HVAC.
Speaker Change: recovering from the pre-bi headwind and TK picking up a bit, but your Organic Growth Guide looks very steady through the year, just a point less in Q1, so trying to understand, you know, does that reflect
Speaker Change: Yeah, hi Julian. It's Chris. I'll start. Yeah, think about the first quarter and I'll start with residential, right? Dave called out the pre-buy estimate that we had around 75 million to 100 million dollars.
Speaker Change: We expect that should largely impact the first quarter. It may extend beyond that, but right now we're thinking that should largely impact the first quarter. Probably means residential is flat to slightly down in the first quarter.
Speaker Change: Transport markets, as you described, I mean we're seeing them bottom out in the first half of the year, probably a bit under challenge here in the first quarter.
Speaker Change: But we're seeing continued strength in the commercial HVAC businesses, so think of them as a pie single digit, could be 10%.
Speaker Change: growth here, even in the start of the first quarter. But it's really why we have a range of 6% to 7% organic revenue growth for the first quarter. We think the guide's in the right range.
We've got opportunities and multiple ways to get there.
Speaker Change: But you're right. I mean, transport residential, it may have a start that could be a little bit down at the beginning of the year, but a lot of strength coming through commercial HVAC, and then we have multiple opportunities as we
Speaker Change: execute to the guide on the full year, which we said was seven to eight percent organic revenue growth. A lot of confidence in our guide for the first quarter and for the full year.
Speaker Change: Thanks very much and then just my follow up would be around the price sort of volume outlook within the organic sales guide so I think fourth quarter
Speaker Change: price was sort of one one to two points across the company higher than that in the Americas when we're thinking about the year ahead is it sort of a similar you know one to two point price tailwinds in in the sales mix and any sort of concerns
Speaker Change: about customers, you know, for example, in the resi channels pushing back on price increases.
Speaker Change: Yeah, for the fourth quarter, price was a little bit above two points.
Speaker Change: It really has been coming down over the last couple of years, and now for the full year in 2024, it's a little bit above two points as well. And the Americas would be really the driver there, a little bit above two points in the Americas.
Speaker Change: It's less of the carryover from 2024 pricing that would impact 2025, just given the low nature of the contribution in 2024. It's really around the new price increases that we put in place for 2025.
Speaker Change: On residential, you mentioned that, just to be clear on the transition to the lower refrigerant, the 454B refrigerant.
Speaker Change: for us. We're going to report that price increase, which is high single digits for that portfolio. We're going to report that in volume so that would not be part of price.
Speaker Change: But think of that as, you know, on 65% of the portfolio and then about 75% of the year, three-quarters of the year, really being impacted by that transition for the A2L refrigerant. So hopefully that gives you a sense. We're probably in that one to one and a half point price range for the year.
Thank you very much.
That's great. Thank you.
Thanks, Jillian. Thank you.
Speaker Change: Our next question comes from the line of Andy Kaplowitz with Citi. Please go ahead.
Hey, good morning everyone.
Hey Andy, how you doing? Good, how are you?
Speaker Change: Chris's question in a slightly different way. I know you have the 14 verticals, but are data center project bookings expected to lead growth, for instance, in 25 versus 24? And it seems like
Speaker Change: education related bookings are holding up well you know there's been some consternation about that and just on the comps issue like comps in North America seem like they get continue to get a little more difficult can you still grow commercial HVAC bookings in North America even against difficult comps?
Speaker Change: Yeah, a lot there, Andy. But look, we saw growth in, like I said, in almost all verticals. So yeah, data centers were strong, but we had a lot of other verticals that were very, very strong.
Speaker Change: and you know you hit on one, education. Education has been strong, certainly ESSER funding was a tailwind there, but even in the fourth quarter where ESSER funding is now at least from an order standpoint behind us, we still saw growth.
Speaker Change: and fourth quarter bookings. And I would tell you, the pipeline there in education is very, very robust. So look, as far as the, do we think there's opportunities that comps get hard? Look, we still believe there's tremendous opportunities here for growth in all verticals, right? If you think about the mega trends around,
Speaker Change: Now, decarbonization and energy efficiency, they continue to intensify if you think about reshoring activity in the United States.
Speaker Change: That continues to intensify. If you think about the multi-year CapEx cycle with megaprojects, that continues to have momentum. So, we're very bullish on our commercial HVAC business. I would tell you that...
Speaker Change: The portfolio of products and the innovation that we have there. I know I said in my prepared remarks, we are green for green. When you have a solution that's very sustainable for the planet and has a great payback for the customer,
Speaker Change: It's a great place to be and that's what we have at Trane Technology. So I'm very bullish about the future
Speaker Change: You mentioned transport mix, is that really what it is? But you also talked about investments quite a bit. Could you quantify how much they were and what you're thinking for 25?
Speaker Change: We expected sequential improvement in Asia in the fourth quarter versus the third quarter and
Speaker Change: our team in Asia just as, you know, even outperformed those expectations. It's still going to take some time to continue to normalize in China the tightened credit policy, so that'll probably extend into the first half of
Speaker Change: 2025, but their decisions were the right decisions and you're seeing that come through on sequential improvement versus what we saw in the third quarter.
Speaker Change: margins. Look, that team has just been outstanding in terms of managing their
productivity
Speaker Change: their investments and ultimately still investing in the business. So let's see where margins go for going forward. They're certainly leading margins across the regions and it gives us a lot of confidence that.
Speaker Change: AMEA and Americas can continue to grow their margins into the future as well given just to recall our Asian business it's largely commercial HVAC that they're selling into the region.
Speaker Change: For the other markets, very strong results in terms of margin expansion. We're driving all of those businesses for 25% or better leverage into 2025. We like that.
Speaker Change: framework, you know, the last couple of years we've actually we've taken the lid off of investments. We're making sure that we can drive strong leverage and also accelerating as many investments as we can and that's really across all three of our regions.
Thank you. Bye.
Speaker Change: Otherwise, I think that hopefully answers the question. We have a lot of confidence that we're going to be able to grow the margins and really the leverage with the investments we're making.
Speaker Change: Yeah, I'll just add that, look, I'm super proud of the team in Asia. You know, I know Asia, it's only 8% of our revenue, 50% of that's China, 50% outside the rest of Asia, but I mean, just great performance. I mean, the rest of Asia had 10% growth.
Speaker Change: It had order growth in the high teams, so a very strong performance there.
and as Chris commented, the team and.
Speaker Change: and China just executed very well, implementing our new credit policy and the credit tightening is the right reason. And I was very, the right prudent thing to do. And I was very clear on the third quarter, if we don't have an order, we're not gonna, we don't have a down payment, we're not gonna take the order.
Speaker Change: and in the fourth quarter we made some adjustments to our backlog to make sure that everything in the backlog had down payments in it. So that team is just executing at a very high level.
Appreciate the color, guys.
Sure, you're welcome.
Speaker Change: Our next question comes from the line of Amit Mehrotra with UBS. Please go ahead.
Thanks, morning, guys.
Dave
Speaker Change: Can you talk about, you know, the margin, just coming back to the service conversation at the front of the call, just to understand the margin opportunity in the service business over time. I know there's a lot of investments in technology to make technicians more efficient, maybe predictive maintenance.
Speaker Change: I'm hoping if you just speak to the runway there, just given obviously it's a third of the business and, you know, the installed base is growing quite rapidly. And, you know, a few years from now.
Speaker Change: who'd be quite larger, so if you could talk about that.
Speaker Change: Hey, it's Chris. I'll start. Yeah, look, we like the margins in the service business. It's higher margins.
Speaker Change: when you think about what we're delivering to customers and making sure that their products are running efficiently. You know, as Dave's described in the past, you know, the service business is rapidly evolving from, you know, running to go fix something that's not working effectively, to now making sure that the equipment's always optimized.
Speaker Change: It may be running, you may think it's operating well, but the fact is it may be operating inefficiently and therefore that's a really nice opportunity for us. So, it gives us a lot of confidence that we should be driving organic leverage 25% or better. And a reminder, services is a third of the enterprise revenues.
Speaker Change: It remains a third of the enterprise revenues, and you're right, the investments that we've been making
across our portfolio.
Speaker Change: also include investments on our service portfolio. So think about service technicians, think about front-end tools.
Digital, in terms of diagnostics.
Speaker Change: It's an area that, you know, again, that's a great area to take the lid off and keep investing in that part of our portfolio. Yeah, I mean, one of the things that we announced in the quarter, too, was the closure of an acquisition, BrainBox AI.
Speaker Change: And that's really going to help our service business as well in the future. So, if you think about, you know, today we have 42,000 roughly connected buildings. We have well over 2 million connected assets.
Speaker Change: We're getting a lot of data at the building level and at the asset level.
Speaker Change: and we'll call that structured data. What AI does is it augments that with unstructured data.
Speaker Change: When you combine that, that's really where you're able to make buildings operate more efficiently.
Speaker Change: So, our service teams will be a big part of that in the future, and I know you've probably heard me speak in the past about demand-side management. Look,
Speaker Change: you know, back to where it was designed to operate. And if we could save that 30%, there's so much opportunity there well into the future.
Speaker Change: and then just just related to that because obviously paybacks are so compelling today which is
what's driving a lot of the growth.
Speaker Change: But there is this expectation that power prices will continue to go up over the next several years.
Speaker Change: I guess the BrainBox acquisition probably allows the equipment to run even more efficiently. Can you just talk about, you know, how you think the payback map evolves over the next few years?
Speaker Change: because there's the question you routinely get is how long is it sustainable but if paybacks can actually improve I wonder if this growth can can actually reaccelerate.
Speaker Change: I think you're spot on. I don't think anyone's projecting that the cost of energy, or at least electricity, is going to go down.
Speaker Change: in the future, right? So you think of the paybacks, it's actually gonna become more punitive if you're not running the system the way it was designed.
Speaker Change: So the paybacks will actually increase. So we're, you know, we think there's a tremendous opportunity in demand-side management.
Speaker Change: and we're executing to that strategy. Brain Box can be a big part of us. You know, it's a small business today, but we've been really good at taking these technologies, in this case, the technologies on the software side, and scaling it within our channels. So we're really excited about the growth that we're gonna see in the future from it.
[inaudible]
Thanks a lot. Appreciate it.
Sure, thanks a bit.
Speaker Change: Our next question comes from the line of Scott Davis with Melius Research. Please go ahead.
Hey, good morning, guys.
Hey Scott, how you doing? Good morning.
Good, good, congrats on a very strong year.
Speaker Change: Is there is there such a thing as kind of thinking about that as you know I'll just call it like front log that you know energy audits are up X percent this
Speaker Change: this quarter and that that gives you some additional confidence on the backlog.
Yeah. And the front line.
Speaker Change: It's a great question, Scott, but obviously we have a lot built into our operating system around our energy management system.
Speaker Change: audits that we do so I won't disclose too much there but absolutely you know we track a lot of different metrics okay and a lot of them are leading metrics and that would be one of them but we track a lot of others as well. At the end of the day it's when you're connected to an asset you're going to make sure the asset is performing the way it was designed and it's not wasting precious energy.
Speaker Change: and when you get when you show that to customers and they start to understand it
Speaker Change: it becomes very compelling. And now with the addition of not only the structured or machine learning data that we've been able to derive in the past, this unstructured data that we bring into the equation with BrainBox, it really...
Speaker Change: were able to drive results that we didn't think were possible three or four years ago.
Zach Nagle: Dave, can you use AI now to do a digital twin meaningfully faster than you could in the past? Are we there? Are we at that point yet?
Zach Nagle: Yeah, we do we do a lot of work with digital twins I'm not sure if you saw it when you went to 55 Water Street because I think we demonstrated one there The speed is always getting better and the tools that we're using obviously We're using all the tools that we could we have available to us and AI is one of those tools So it's certainly there's other tools as well that have really sped up that process, but it's some
Zach Nagle: It's when you can see it visually, and you see the digital twin, and then you see the before and after.
Zach Nagle: It's very, very compelling for the customer to understand the impact that we're able to have by constantly monitoring the equipment and constantly making sure it's at the peak performance levels.
OK.
Best of luck this year, guys. Appreciate it. Thanks, Jeff.
Speaker Change: Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please go ahead.
Hey, guys. Good morning.
Hey Joe, how are you?
Speaker Change: Oh, doing great. Thanks, Dave. So look, for better or for worse, your stock at times tends to trade with the sentiments of surrounding AI, catbags, and data centers.
Speaker Change: I guess just maybe as you kind of, as you think through like the trajectory of your data center business from here, maybe just give us some color on how you think that you expect that to progress.
Speaker Change: And then also just on your commercial HVAC backlog, are you still well above normal on that backlog in terms of how long cycle it is or is it starting to normalize?
Speaker Change: Yeah, why don't I start with the backlog, then I'll get to the data center question.
Speaker Change: What everyone needs to understand is we had a couple adjustments that occurred within the backlog, right? There's really three. One is, you know, currency worked against us all year.
Speaker Change: Two is, I've been very clear in Asia, specifically in China, that if we don't have a down payment, we're not including something in our backlog. So we adjusted that out of our backlog. And then the third is, is the normalization of our
Speaker Change: of our transport businesses which have been under pressure all year. That accounts for about a half billion dollars of backlog adjustments.
Speaker Change: that we took in the year. So if you think about it, our backlog would actually be up year over year versus what we're reporting right now.
Speaker Change: That said, our backlog is very, very elevated, which gives us a lot of visibility into 2025, and that's why Chris and I could speak with so much confidence.
Speaker Change: about the guide that we're putting forward. It gives us great visibility. And the other thing that we track a lot of is the pipelines, and these are orders before they become orders. That activity remains very, very robust.
Speaker Change: As far as data centers go, look, data centers have been a strong vertical for us for decades and they'll be a strong vertical for us well into the future. As far as the, you know, the news about, you know,
Speaker Change: New competitor coming out of China and the impact that will have You know, we'll see I can't comment on that. I could just comment on what we're seeing right now And we're seeing a lot of growth in data centers, and we're seeing a lot of pipeline activity in data centers
I had the opportunity to listen to the earnings call.
Speaker Change: last night, and if you listen to them, they would say that they're building out their infrastructure, and that's part of a competitive advantage that they have. So it doesn't appear as though they're going to be slowing anything down, but we'll wait and see, but everyone needs to understand that we're much more than just data centers.
Speaker Change: Data centers are strong. They've been strong in the past. We're really good in that vertical, but we're really good in 13 other verticals that we track very, very closely.
Speaker Change: Super helpful and bless you to whoever sneezed in the background. The quick question follow-up there is just maybe just a tariff question. Any comments on like how you see this playing out and any thoughts and your potential exposure there?
Speaker Change: Yeah, I mean, good question, Joe. Look, we, for decades now, we've had a manufacturing strategy of in-region, for-region.
Speaker Change: So, you know, you think about in the Americas, we have a plant in Mexico. We have over 20 plants in the United States.
Speaker Change: We have plants throughout Europe. We have plants throughout Asia, some in China, some outside of China.
So, look, we've, in the past, we've dealt with tariffs.
Speaker Change: Should they happen? Will we react? Do I think they could impact our supply chain? For sure. There's a little bit of flexibility there, but they will have an impact. But I think we've been able, you know, part of our operating system is we understand our cost inputs.
Speaker Change: and if we see something change we're going to react and we're going to act very quickly to make sure that we stay margin neutral over time.
Thanks, guys.
Thanks, Joe.
Speaker Change: Our next question comes from the line of Steve Tussa with J.P. Morgan. Please go ahead.
Hey, good morning.
Hey Steve, how are you?
Thank you.
Speaker Change: Good, always interesting times. So I guess just on this Resi guide, roughly, I don't know, 4%-ish on...
The Mix Benefit, which you'll call volume.
a, you know, one and a half, maybe.
Speaker Change: 2% headwind from pre-buy, this is all annual. So, what are you thinking about the market on a volume basis this year, just from an underlying demand and replacement events perspective, if you will?
Speaker Change: Yeah, Steve, it's Chris. Yeah, you're right. There's three elements that really come into the guide of around mid-single-digit revenue growth for residential. The first one would be that mixed tailwind from the A-12 refrigerant change, right? You can think of that as maybe around four points.
high single-digit price.
Speaker Change: on 65% of the portfolio multiplied by, say, 3 quarters of the year impact gets you to around 4 points.
Speaker Change: The view around a GDP plus framework would be the second element. Think of that as maybe three to four points of growth from returning to GDP.
Speaker Change: IRA tailwinds, right, that money is at the state level and it's really starting to be deployed. That could be a tailwind for 2025.
Speaker Change: And then items around consumer confidence, tax cuts, those are all things that could be beneficial to the, you know, to a GDP Plus framework for the year.
Speaker Change: And then the third element would be that pre-buy dynamic, which is probably around three percentage points of a headwind. So altogether you get into that four to five-ish range on growth.
which is our guide for the year around residential.
But, to be fair, if it turned out that...
Speaker Change: things were softer in the markets and it wasn't necessarily growth but it was flattish and really the impact to our enterprise revenues would be less than a point. It would be 70 or 80 basis points and you really feel comfortable we've got that and it's manageable within our guidance for the year.
Speaker Change: Yeah, that makes sense. What are you guys seeing in light commercial? What's your expectation for the Iran light commercial?
Speaker Change: Yeah, we certainly think applied markets are going to grow faster than the unitary markets will for 2025. We'll see where it plays out.
Speaker Change: The best thing about Trane Technologies is we've got the broadest portfolio of products. And, you know, unitary versus applied, it's harder and harder to kind of figure out what the need for the customer is. We're looking at a solution.
Speaker Change: And many of those solutions will involve multiple products to ultimately deliver the energy savings that they need. So, let's see. But, you know, probably more growth than applied for 2025 than unitary.
Speaker Change: One last thing, given services is such a topic. Dave, you said like eight to ten times, I think, the multiplier on services.
Speaker Change: That just seems like a big number for an asset that has like, I don't know, a 30-year
Speaker Change: useful life that basically people are spending that much money every like
Speaker Change: you know, three years to service. Is that really like the considered an annuity or is that more like every five years they do like a major refurb or something like that? Like how visible is that revenue? Because it just seems like a really big number for a building.
Guy are an equipment owner to to spend
relative to his initial buy.
Speaker Change: You know, just understand eight to ten over the life of the asset, right? So the asset's going to add 30 years and the asset cost a million. Think of it at eight million in service over that time period.
Speaker Change: But, yeah, I mean, there's the maintenance that happens, and then obviously, you know, at some point in the useful life, you tend to do our nulls for it, where you'll...
Speaker Change: change out controls or make it run more efficiently just because technology continues to advance. So we're very comfortable with that number. We've done a lot of analysis on that with installed base. So I'm very comfortable with the 8 to 10 times over the life of the asset.
Okay, great. Thanks a lot.
Speaker Change: are involved in the funeral process. Recently, Muscogee County and Hartford County have been operating self-mortification religious retreats for the last 30 years. Forty-eight hundred members have called the件 Listing, which allows participants to be a member of the singles reveler church which will be held for 30 days tonight here, at around 8PM, in front of Wake Empire Stadium, at 11 counties in the West Coast area
Speaker Change: Our next question comes from the line of Jeffrey Sprague with Vertical Research. Please go ahead.
Speaker Change: Hey thanks, good morning everyone. It's a little chilly, it's warmed up recently but yeah we're not needing any any HVAC in the, well we don't need any ACK, we need some H, that's what we need.
You need a heat pump, Jeff, but go ahead.
Speaker Change: you know, kind of the backlog staging, what's deliverable in 25 and how far out it does reach.
Speaker Change: Yeah, Jeff, it's Chris. I'll start. So 6.75 billion of backlog at the end of 2024. Again, the majority of that, call it 90%, is going to be driven by commercial HVAC globally. And then of that, it's going to be majority applied systems.
Speaker Change: That backlog, the majority of it will revenue in 2025. So that's actually fairly consistent with how we've seen the backlog in terms of the growth over the last few years, that the majority will turn around in 2025.
Speaker Change: There'll be a small amount that'll, you know, push out into 2026, and that's really at the customer demand, but the majority of that backlog will turn within 12 months. And Jeff, remember, we don't have services in the backlog.
Speaker Change: Right, yeah. Majority doesn't mean 55%. It means 80 or 90 or something like that, it sounds like. Yeah, it's not a tick above 51 or 50, but no.
You're absolutely right.
Speaker Change: Yeah, and could you just also just really in the weeds on Resi how sort of how did the two-step channel perform in the quarter versus your internal channels as we kind of think about all the
prebiotic gyrations.
Speaker Change: The pre-buy obviously happened with our IWT's, Independent Wholesale Distributors. Think of that pre-buy, that $75 to $100 million, Jeff, as between Q3 and Q4.
Speaker Change: All right, we don't think it was all in Q4. It's hard to tell because we're estimating, but we think probably about 50% was in Q3, 50% of it was in Q4. But we also think, as Chris said earlier, that the majority of that will be impacted in the first.
Speaker Change: Some of it will probably go into the second quarter, but we can give you guys an update on that when we get to that point.
Great, I'll leave it there. Good luck this year. Thanks.
Thanks.
Speaker Change: Our next question comes from the line of Nigel Koh with Wolf Research. Please go ahead.
Thanks. Good morning.
Speaker Change: Lots of questions on services so here's another one. So I probably should know this but what is the mix between you know predictive connected type services?
Speaker Change: versus, I guess, transactional services where there's a phone call from a customer, where there's parts involved, etc. So just wondering, you know, what that mix is and does it matter? I mean, is there a growth differential? Is there a margin differential between, you know, connected versus transactional?
Speaker Change: It really doesn't matter, but we haven't disclosed that, Nigel, for a lot of different reasons, but we're strong in both. Obviously, we want to encourage our customers to have agreements because
Speaker Change: We make sure that the assets, we do more maintenance then to make sure that the assets are performing but obviously we're going to respond if we get just a cold call saying hey my system is down can you help me and then what we'll do is if that happens the goal is to make sure that we try to sign that customer up for a more
Comprehensive Service Agreement over time.
Speaker Change: Is there a margin differential between whether the contract is more transactional?
Speaker Change: I'll say no, but there might be one if it's a cold call, OK, depending on what's going on. We try not to.
Speaker Change: You know, because someone's in a dire need, charge them more. That's that's usually not a long-term way to grow a business So we try to be competitive in both Just because we want the customer for life
Speaker Change: Okay, and then a question on BrainBox. I can't believe I said that, but BrainBox AI.
Speaker Change: It seems like it's quite a chunky deal, looks like $3 million or so, EV, just wondering if you just give any details on the size, growth profile, you know, how you can like really kind of, you know, really expand this business.
Speaker Change: And then a nerdy accounting question for Chris, I think, you know, when this sounds like a very sort of intangible heavy business, so just curious if the intangible amortization is coming down when we think about that step down in the trade amortization, you know, from 15 years ago.
Speaker Change: Yeah, Nigel, I'll start with BrainBox. So, less than $300 million from our purchase price, we had another meaningful acquisition that we closed on in the first week of January like we did with BrainBox.
Speaker Change: actually over in Europe, acquiring one of our independent channels there, very similar to a strategy that we have in the U.S. So, but yeah, less than that from an EV perspective.
Speaker Change: and not dissimilar to Novolo in 2024 with early-stage technology company has a lot of amortization expense. We're expecting that to happen in 2025 for BrainBox.
Speaker Change: It's part of the guide in terms of the FX headwind, and the amortization from the newly acquired business will have about a 20 cent negative impact on earnings, and we've got that incorporated in our guide. But you're right, that's kind of the accounting rules around the acquisition.
Speaker Change: On the accounting rules going back to Trane, you're right. We start stepping down on the Trane amortization in 2025. It's around $25 or $30 million of lower amortization expense.
Speaker Change: That's really being offset fully with the investments we've made over the last few years in CapEx and the rising depreciation that comes from from that.
Speaker Change: We've also had a few acquisitions that have some higher amortization as well. So in 2025, the net impact of that benefit from the train amortization is really offset and nil.
Speaker Change: Let's see this in 2026. It's a bigger step down in 26 on train amortization. We'll update
Speaker Change: you then for next year, but for 2025, it's really a neutral impact. Yeah, and as far as the growth rates go, you know, Nigel, look, we're pretty excited about it. It's small today, but we like these technology companies that we could scale. We have 42,000 buildings, right? So there's 42,000 potential customers that we already have the data on.
Speaker Change: that we're going to start running algorithms against it to understand what the impact could be with
Speaker Change: structured and unstructured data to get. So this is this is going to be excited and like I said it's going to be a nice tail for our service business earlier.
Great, thanks guys.
Thank you.
Speaker Change: Our next question comes from the line of Dean Dre with RBC Capital Markets. Please go ahead.
Thank you. Good morning, everyone.
Speaker Change: Hey Dean, how are you? Doing real well, thank you. Maybe just circle back on the pre-buy. It seems like it was relatively uneventful, at least in terms of how you were positioned. But if you just step back, anything that surprised you?
in terms of the demand, the timing.
Speaker Change: And there's always this nuance about competitive positioning, who cuts over first, but kind of just the post-mortem, was there anything that you'd call out in terms of?
Thank you.
what you were expecting or what didn't play.
out.
Speaker Change: Not really, Dean. I mean, we've said for a long time we thought it would be a modest pre-buy. It was.
Speaker Change: The team did a nice job of executing the changeover to the A2L refrigerant. We're fully operational on 454B product now.
Speaker Change: We have the capability of running mixed model lines in our factories, so we can support the aftermarket for 410, which will be needed.
Speaker Change: But not a lot. I mean, it was pretty much as we predicted. The only thing I would say maybe a little bit different is we probably had more of the pre-buy in Q3 than
Speaker Change: I didn't realize it was a kind of a pre-buy until we got into Q4, so that would have been the only...
Speaker Change: maybe oddity, but it makes sense though too. Why would you wait to the fourth quarter if you're going to do a pre-buy and you might not have product? So we probably saw more in Q3 than I anticipated, but again, we're talking about relatively small numbers that really don't have a big impact on results.
Speaker Change: Good to hear and I also like hearing that you say 410 is going to be around for a while because I will be a user of that.
So...
Thank you.
Speaker Change: here. And then, just second question, just circling back on China and it, that whole tightening the credit.
Speaker Change: It seems to have played out exactly the way you said you would be getting the down payments.
Speaker Change: may be some progress payments. But did you, when I hear about tightening credit, that also makes me think that you actually turned down some customers or, you know, maybe shining away from particular vertical. So has there been any selectivity going on maybe related to this credit sensitivity?
Speaker Change: At the end of the day, we call it tightening credit. What we're doing there is we're requiring down payments. We're requiring a down payment when the order comes in, and we're requiring an additional down payment before the order will ship.
Speaker Change: So it's not specific to any one vertical or any one channel. That's just the rules of the game that we're operating with. And the team is doing a nice job of
Speaker Change: educating our customers as to the why and we made nice progress in the fourth quarter compared to the third quarter. We have some work in front of us in the in the first half of 2025 but this is the this is our new way of doing business in China.
Great. I appreciate that, Collar. Thank you.
Sure.
Speaker Change: Our next question comes from the line of Tommy Moll with Stevens. Please go ahead.
Good morning and thank you for taking my questions.
Hey Tommy, how are you?
Speaker Change: Doing fine, thank you. Chris, you called out early in the call that if we look at the first quarter earnings contribution as a fraction of the full year outlook you've provided,
It's a bit higher than the average.
Speaker Change: I thought about it differently just given the transport and resi headwinds in the first quarter.
Speaker Change: So, is there something we're missing that changes as you go into Cues 2, 3, 4, or is it perhaps some conservatism just about what's longer dated here, just help us triangulate there.
Speaker Change: Yeah, we wanted to call out, Tommy, that, you know, EPS, the percent of the full year guide is around 17%. It's normally 15 to 16%, so we are starting the first quarter a little bit ahead of that three-year and five-year average, which we just wanted to make sure everyone understood. It's a strong guide for the first quarter, and we have a lot of confidence in it.
Speaker Change: As you work throughout the year though, you know, the transport markets are going to be expected to be down in the first half. There's expected recovery starting in the second half of the year.
Speaker Change: roughly flattish, maybe plus or minus low single digits for the full year, but growth in the second half. And really what's exciting is the growth expectations for 2026 and 2027 in the transport markets in the Americas. So we'll see how the year plays out. But yeah, there's more of a headwind in the first half of the year from transport.
Speaker Change: residential the first quarter a little bit more of a headwind from that pre-buy right we think that'll largely impact the first quarter
Speaker Change: It may drip into the second quarter or beyond. We'll update as we go throughout the year. But that'll really normalize, let's say, by the second half of the year. And we'll see where growth is based on market conditions and then the tail end we're getting from the A2L pricing.
Speaker Change: So those are the two that would stand out to me
Maybe the third would be Asia
Speaker Change: Again, that new business in China and our team, again, executing very well there. That could be a little more headwind in the first half of the year, much easier comps as you get into the second half of the year in Asia. So I think those three would probably really be the dynamics I'd call out now.
Speaker Change: I just want to ask if there's anything more you can share there. Dave, I think you mentioned one investment in Europe.
Speaker Change: But if there's anything you want to call out in terms of a strategy update there, please do, or if this is the same as before and just some opportunistic feedback.
Speaker Change: We've been buying up our independence in our commercial HVAC business for a long time.
These are great businesses. They've had great leaders.
Speaker Change: It's opportunistic for us to buy them off. So nothing's changed there with our strategy. There's not a lot of them left, unfortunately, because they're great acquisitions and they become accretive very, very quickly, like almost instantaneously. But it's just more of the same. And we just had one this time. It was actually in Belgium.
Speaker Change: over in Europe, yeah, for January. So think of it as we've been 95% plus, you know, direct, and it's these last few percentage points of those independent channels that when they're ready, we're ready to kind of fully bring them into the train business.
Thank you both. I'll turn it back.
Sure. Thanks, Tom.
Speaker Change: That will conclude our question and answer session and I will now turn the conference back over to Zach Nagle for closing remarks.
Zach Nagle: Thanks, Operator. I'd like to thank everyone for joining today's call. As usual, we'll be available to answer any questions you may have.
Zach Nagle: in the coming days and, frankly, in coming weeks. We'll also be on the road in the next couple of months attending conferences and other things. And so we hope to see you in person very soon. So hope everyone has a great day. Thank you.
Zach Nagle: This will conclude today's call. Thank you all for joining. You may now disconnect.